Key walks into Labour’s CGT trap

Written By: - Date published: 11:33 am, July 8th, 2011 - 66 comments
Categories: capital gains, labour, national - Tags:

It has been a rare and sincere pleasure to see National walk straight into a trap carefully laid by Labour. Goff and his team haven’t even publicly confirmed their capital gains tax policy but proponents to the Left and Right are winning the pre-launch media framing for them, while Key’s contradictory ranting is undermining his credibility.

Key’s problem is that he went off half-cocked based on the first dribble of information Labour planted in the media. And then he screwed up his line in claiming that a capital gains tax (which would only apply to a few people and exists in most other developed countries) would be the end of the world while also being completely ineffective. He said it was a tax grab that would send the country ‘screaming backwards’ while also not raising any money and Labour was going to rack up more debt. It didn’t make sense and Key’s tone was shrill.

Key’s criticism that it would take a number of years for capital gains tax to start generating its full revenue stream just showed what a short-term thinker he is and reminded the public that Labour has a record of planning on a decades-long timeframe, while Key can’t seem to plan beyond the end of next week, the next PR fiasco.

As more information has come out, Key’s scaremongering has looked increasingly stupid and been overwhelmed by the voices from the Left and the Right who have come out in favour of the transformative effects of a capital gains tax.

Labour has clearly done their homework – well, you would when taking up a policy that is ‘suicide’ according to received wisdom. They’ve carefully designed their product, got the proponents lined up, and planned the release.

Labour’s tax will capture all capital gain except for the family home, which means it will be a healthier revenue stream than Key was saying and bringing us in line with Australia. In fact, it seems that Labour has balanced its books so its debt line is lower than National’s in the future.

That capital gains will be comprehensive, as it is in Australia, makes it a truly revolutionary policy. Right now, a high percentage of farmers, as with a high percentage of landlords, have a business model that rests solely on someone coming along and paying them more for their capital later than they bought it for originally. That’s not a wealth-producing model, it’s a rentier model. Comprehensive capital gains tax will reduce (albeit only by15%) the logic of this rentier model, which should mean we end up with less international debt to pay for farm and housing mortgages and cheaper, more available credit for business. Right now, we not only borrow too much, we borrow it for the wrong stuff:

Labour has clearly learned some lessons from National about dealing with the media in the modern age. Pre-launch framing is now essential and they’ve done it well. The big guns are coming out in support, the journos are eagerly reporting each new tit-bit, and the other side has fallen into the trap of over-reacting before all the information is out, which leaves Key looking stupid and irrelevant.

The self-inflicted damage to Brand Key in the past week was probably not planned by Labour, but it is a welcome side-effect of a successful media strategy.

66 comments on “Key walks into Labour’s CGT trap ”

  1. Colonial Viper 1

    See how those debt lines have levelled off/come down?

    That deleveraging represents money being taken out of the economy. Hence our continuing economic malaise.

    In a heavily debt based economy (debt is where most of our spending cash comes from at one point or another), net debt reduction is always going to cause a massive slow down.

    • David 1.1

      See how they havent come down much if at all. We (a private we, not a govt one) are still way too overleveraged, and it’ll be a while before we arent.

  2. queenstfarmer 2

    So what’s the “damage” to National / Key? The fact that there’s finally a debate on CGT? The fact that some are for it, some are against it?

    • The Voice of Reason 2.1

      The fact that Key has spent the whole week talking about his opponent’s policies. Thats Politics 101, right there. Don’t give the other team the oxygen of publicity, especially before you even know what they are specifically proposing. Key has just spent the last few days talking Labour up as a credible alternative to his own clueless administration.
       
      And, to make it worse, because Labour haven’t made the announcement, they have time to soften the aspects of the CGT proposal that people don’t like prior to the launch and maybe tie it to other changes in housing, such as financial encouragements to first home buyers.
       
      All in all, this could be the week John Key lost the 2011 election.

      • queenstfarmer 2.1.1

        Oh please. All pollies do these days is talk about each other’s policies. Key deliberately pre-empted Labour on CGT, and has kept raising it since. It’s a risk and if it backfires, i.e. if CGT gains popular support – then in retrospect there will be damage. But that is far from clear yet. There’s just a debate broken out – which is a good thing.

        • McFlock 2.1.1.1

          A debate about policy specifics, not personality.
          A debate about evidence, not feeling.
          A debate about low our taxes are, not the “we live in communist NZ” myth.
           
           
          I for one am very interested to see how Key does.

        • Reality Bytes 2.1.1.2

          “It’s a risk and if it backfires, i.e. if CGT gains popular support – then in retrospect there will be damage. But that is far from clear yet.”

          Have you checked the polls lately? This is Nationals election to lose.

          Key is risking that by going off half-cocked opining about Labour’s fiscal policy, and therefore making Labours policies the issue of the day, therefore confirming Labour are the relevant movers and shakers. Goff is being a very guru politician with these moves. The original article perfectly outlines why Goff’s moves are VERY smart policy, that may yet see him as the next prime minister of New Zealand.

  3. vto 3

    ha ha, yes Key is being exposed for his stupidness quite often now.

    Hardtalk interview, which keeps being regurgitated and now this.

    Stupid is as stupid does.

    He should just go back to the finance company world and leave the serious stuff to the rest of us.

  4. Key’s basic problem is that there is this huge vacuum in the debate about the economy because his Government has no economic policy apart from tax cuts for the rich.  Cycleway anyone?  This really is their achilles heel because more and more people have woken up to the fact that they have no plan.
     
    And Goff has done something which all good leaders should do and has sparked off a debate.  It seems that everyone but Key and National is willing to take part in this debate.  And when the Herald and Hooten and others start praising Labour then you know Key is in trouble.

    • higherstandard 4.1

      You are wrong as usual Micky, Key’s plan is to meet Obama in the USA this will of course be a huge boon to the economy and will likely bring about peace and harmony on Earth.

      • Colonial Viper 4.1.1

        You can’t fault the guy for wanting an autographed copy of the inevitable handshake photo. (Key that is, not likely Obama lol)

    • It seems that everyone but Key and National is willing to take part in this debate.

      Haha, here yesterday I got clobbered for suggesting a decent debate was a good idea.

      Time will tell whether CGT is a Dan Carter game or a Nonu Hail Mary.

  5. Eddie, you’re brave counting chickens so comprehensively at this early stage.
    Blog proclamations are not votes.

    When is the policy detail actually being hatched.?

  6. The Baron 6

    [deleted]

    Aren’t you talking out of both sides of your mouth too? I thought this tax is meant to raise somewhere between $3.8 and $4.5 billion to pay for Labour’s lolly scramble – but yet you imply above that hardly anyone will be paying it.
    It’s contradictory to have it both ways – either it’s going to raise enough to be worth doing, which means it has a large base of transactions off which to work; or it won’t affect many, which means it can’t be earning bugger all (and certainly not enough to pay for the tax free threshold bribe); or is going to be set at far bloody more than 15% of realized increases.
    So, which one?

    [lprent: Eddie is their pseudonym. Use that. I don’t allow any attempts on names for what are clearly pseudonyms as part of the general privacy policies. ]

    • Lanthanide 6.1

      “Aren’t you talking out of both sides of your mouth too? I thought this tax is meant to raise somewhere between $3.8 and $4.5 billion to pay for Labour’s lolly scramble – but yet you imply above that hardly anyone will be paying it.”

      Labour never said that.

      The $4.5B number came from the tax working group, and they were using a set of assumptions that are different from what Labour is going to implement. Two differences that we already know of:
      – TWG were assuming a CGT that worked at your marginal tax rate. Labour’s will be a flat 15%.
      – TWG were assuming a CGT that was pay-as-you-go, not tax on realisation, as Labour’s is going to be.

      • The Baron 6.1.1

        Oh, so the answer is that it’s going to be worth bugger all then?
        Eek, that ain’t gonna buy many votes. But thanks for clearing that up. Much ado about a nothing new tax then. Yawn.

        • mickysavage 6.1.1.1

          Labour has two priorities, keep the power company shares and fund the $6b allowance for their sale and provide at some stage tax credits so the first $5k is tax free.

          Keeping the power company shares is quite cheap.  If it raised $300m a year soonish then this would be achieved.  The $5k tax credit is a bit more difficult but if it happens within 3 years then that is a good result.

          Nothing new tax?  Then why is National in such a spin? 

          • The Baron 6.1.1.1.1

            I’m not national, Micky. I’m in a spin because I can’t see how this tax is going to fund the $5b in new spending that Labour has already committed to. Seems to me that this much vaunted new tax that you’re clapping like a seal for is only going to raise about 1/10th of whats needed to balance the books.
            But then again, I read that Labour has also committed to driving us even deeper into debt, so I guess I shouldn’t be surprised.

            • Colonial Viper 6.1.1.1.1.1

              But then again, I read that Labour has also committed to driving us even deeper into debt, so I guess I shouldn’t be surprised.

              No one has nose dived our fiscal position quite like John Key and Bill English have mate.

  7. The Gormless Fool formerly known as Oleolebiscuitbarrell 7

    Wonder what that graph looks like in Australia.

  8. infused 8

    I don’t think so, considering most economists are against it and farmers are preparing an assault. Should be fun to watch.

    • Draco T Bastard 8.1

      The selfish farmers I would believe. The economists? No, not unless they’re more stupid than normal.

      • vto 8.1.1

        Yes farmers may have to rethink their business model and change it to one which makes a taxable income instead of speculating on untaxed capital gains. Imagine that – they may end up paying their share of taxes for a change, instead of the hard working men and women of the city paying for their kids education, their roads, their superannuation, their local rural doctor, and on it goes ….

        It will certainly be fun to watch yet another instant of farmers getting all hot under the collar and squealing like children. Can’t wait.

        • Colonial Viper 8.1.1.1

          Remember that a lot of traditional farmers have and still farm for income, not capital gains. (despite the fact they take deductions on everything down to their gym membership).

          Only the more corporate farmers have leveraged themselves to the hilt looking for capital gains.

          What I am saying is that farmers are a very heterogenous bunch and well worth understanding better.

          • vto 8.1.1.1.1

            true true, I do tend to get carried away and exaggerate at times. But it aint just corporates it is bloody heaps of them, even those who have sometimes been farming for generations. Also true true.

            • McFlock 8.1.1.1.1.1

              What, labour might not get the city investor or the multi-farm dairy polluter? Egad, there goes their voting base!

        • Don’t forget the hardworking farm workers as well vto. Working long hours in all weather for low wages . Most in tied house which are not what one would call luxury . Who pay more tax than their farmer bosses. Who usualy spend their holiday having a day or two out whilst their farmer bosses trip abroad . It’s certainly time farmers paid their fair share of tax and I hope the next Labour government makes sure they do

      • TightyRighty 8.1.2

        Any economist will tell you that adding a tax is a drain on the economy unless the same people hit with a tax increase are compensated in another way and can result in a paradoxical situation where the total tax take goes down as the rates increase.

        Labour obviously knows all about paradoxical situations, the more they bleat and threaten so spend others peoples money (previously a good vote buying tactic) they find there poll ratings shrinking, a parable maybe?

        Great Flip Flop though. points for executing a bare faced u-turn without the media picking it up.

        On the whole I support a capital gains tax, but if the gains tax is flat, so should income tax be. It’s not closing a loop whole if you are running two different tax equations for what essentially is the same thing.

        • Colonial Viper 8.1.2.1

          Any economist will tell you that adding a tax is a drain on the economy unless the same people hit with a tax increase are compensated in another way

          Bullshit

          Since tax money is not hoarded but immediately spent back into the economy as salaries, purchases and infrastructure.

        • Secret Squirrel 8.1.2.2

          I support some form of CGT too, in addition to what we’ve got, but I think you’ve touched on my biggest worry about what Labour might propose – another tax, with a whole new set of rules (and if it’s anything like the Aussie CGT there will be plenty of rules) is just adding complication to an already complex tax system.

          And Labour wants to make GST more complicated too. The more complex it is the easier avoidance is and the higher complicance costs will be.

          A truly bold tax policy would propose a whole revamp of the tax and benefit system that made it much simpler and clearer, and eliminated all the take here, give there money-go-rounds.

          • Jim Nald 8.1.2.2.1

            The Kiwi mind cannot handle complexity.
            Also, the NZ accountants, who are from the remaining ranks of the B-list and C-list in terms of ability, can only deal with a system very much simpler than that in Australia, UK, etc … for which our A-list accountants, investors, etc have already left this country.

            • Colonial Viper 8.1.2.2.1.1

              Yeah those were my thoughts. Next we’ll have people saying that having 91, 95 and 98 octane petrol is too complex.

              And $4B p.a. (or even $500M p.a.) is worth a bit of complexity, no?

            • stargazer 8.1.2.2.1.2

              oh piss off. nz accountants are just fine. it’s our clients who complain about paying the bills for more complex work.

        • Draco T Bastard 8.1.2.3

          Any economist will tell you that adding a tax is a drain on the economy…

          Only if they’re really stupid which, admittedly, most economists are. We need to pay for the services that the government provides and tax is the way we do it. If you’re going to argue that tax is “a drain on the economy” then you better be prepared to argue that charging for milk at the dairy is also such a drain because it’s the same damn principal.

          It’s not closing a loop whole if you are running two different tax equations for what essentially is the same thing.

          Now, I agree with you in principal on this but I’m sure you’re just going flat tax, yeehaa and not thinking about what else is needed to be done to make it work such as a Universal Income.

          • Reality Bytes 8.1.2.3.1

            “We need to pay for the services that the government provides and tax is the way we do it.”

            Well the only other way is to borrow. And regardless of your opinion on tax, one thing is for certain, at the rate we’re doing it, Borrowing is DEFINITELY going to be the bigger drain on the economy in the long run.

            Labour: Appropriate Tax rates now.

            or

            Nats: Insufficient Tax rates now, So we all have to pay more taxes later when the bill for the interest arrives, oh and we’ll need to fire-sale our profitable assets too.

        • Kaplan 8.1.2.4

          “Any economist will tell you that adding a tax is a drain on the economy”

          You might get away with that kind of crap statement at the sewer but over here you’ll get slaughtered on it.

          In the very next paragraph you talk about ‘spending other peoples money’ so you obviously realise that tax raised is not stuffed under some mattress somewhere.

          I’m starting to understand why some people vote for National. They really don’t have a clue.

          • Colonial Viper 8.1.2.4.1

            Wealthy capitalists suck money out of the real economy and out of Main St, in order to stuff it into piles on Wall St or in investment properties.

            That’s what drains money (productive investment capital, working capital and income) out of the economy.

        • Zaphod Beeblebrox 8.1.2.5

          Yeah but look what they intend spending the revenue on- 1. no GST on fresh food 2. First 5000 tax free. Which are tax cuts!!! 3. Paying off English and Key’s financial black hole.

          So if you like tax cuts and their stimulatory economic effects you probably need to vote Labour.

    • Lazy Susan 8.2

      most economists are against it

      And which ones might they be? Citations please. Remember patsies that work for the banks don’t count.

      I’m just waiting for them to come out bleating as they see that nice easy revenue stream from highly geared property and farm speculation dry up.

      • Colonial Viper 8.2.1

        most economists are against it

        Is this a plus or a minus? You see, I’m not quite sure 😀

  9. Colonial Viper 9

    John Key: That blast came from Labour! That thing’s fully operational!
    John Key: English, this is Your Leader.
    Bill English: We saw it. All blue craft, prepare to retreat.
    John Key: We won’t get another chance at this, Bill.
    Steven Joyce: We have no choice, General Key! Our uncoordinated flimsy PR can’t possibly repel policy firepower of that magnitude!
    John Key: C.T. will have our talking points ready, and it’s almost the RWC. We’ve just got to give them more time!

  10. tsmithfield 10

    I think there will be a clear line of attack if Labour are budgeting to get x billions in revenue from the tax to fund other promises, because in today’s environment of a flat economy there won’t be much in the way of capital gain to tax.

    • Colonial Viper 10.1

      yeah but that’s the perfect time to introduce a capital gains tax – no one loses a cent. The problem as you have identified is if Labour is betting on a sudden upswing in property values (and actual sales) to generate immediate revenue with.

    • mike 10.2

      Read the comments by Sydney Morning Herald economics correspondent in the headline post.
      ie “A capital gains tax could be very effective if it raised nothing. What the capital gains tax does ideally is stop people, for tax reasons, changing income into capital gain. So even if the amount that you forecast you would raise from the capital gains tax is low, that isn’t an argument against the capital gains tax. Because if it is low, it’s because what it is doing is encouraging people to make fewer “capital gains” (with quotation marks around them) and make greater income.

      It’s more a case of just not having (sort of) a big gap in the tax system people can drive trucks through.”

    • Zaphod Beeblebrox 10.3

      So what are you saying about National’s economic management? That its crap??

      In any case- Tax and Spend sounds better than Borrow and Spend

  11. Ali 11

    I think lots of people are missing the point that a capital gains is not just about the direct revenue it raises. It is also very importnatly about closing off loop holes for people to move income into untaxable areas. Countries that have CGT have more tax being paid on income because there is no incentive to moving all the income to these areas. e.g “Farmers putting all the profit back into Farms and declaring pathetically low incomes while waiting for a sale price one day that with massive profit that will not be taxed” “profit on shares that will not be taxed when you sell the shares (often CEOs get shares as part of a salary package = no income tax when sold for profit)… you get the idea.

  12. Peter 12

    A capital gains tax is after all a tax on income so what is the problem

    • Draco T Bastard 12.1

      Some people are worried that they’ll get treated the same as everyone else rather than as the “special” people they believe themselves to be.

      • The Gormless Fool formerly known as Oleolebiscuitbarrell 12.1.1

        “A capital gains tax is after all a tax on income so what is the problem”

        Ummm. It’s not a tax on income. It’s a tax on capital. That’s why they call it a capital gains tax. Otherwise, it would be an income tax.

        • higherstandard 12.1.1.1

          Best description I’ve seen is as below.

          “Investors receive two types of income: ordinary income and capital gains. Ordinary income includes dividends, wages/salary and interest you receive. You have a capital gain when you sell a capital asset for a profit. Any asset you hold as an investment (stocks, bonds, real estate, for example) is a capital asset.

          Of course, you can also lose money when you sell a capital asset: a capital loss.”

        • Draco T Bastard 12.1.1.2

          You buy an asset for $10k. A while later you sell it for $15k. Say inflation was $4k that leaves $1k more than you paid which is profit and profit is income.

  13. ak 13

    Tipping Point

    All the chooks coming home together.

    Chooks with votes, of ruffled feather

    For the “economic wizard” who hocked their mokos to the scruff

    Chased their kids overseas

    And wants to hock off their stuff

    Who welched on the bribe of “north of $50 a week”

    Made the bosses into slave owners

    And stomped on the weak

    Now even his big-money pals

    Say the rich should pay more

    The greasy grin’s a grimace

    It’s Nice no more.

    Flailing like a ferret on a hot tin roof

    Every dip in the polls a stab of reproof

    The fear of failure gnawing to the marrow

    Yesterday’s assassin

    Frying tomorrow.

    • marsman 13.1

      I like your poem ! Especially the last two lines. We must make it happen !

  14. Graham 14

    CGT should stand for Corporate Greed Tax

    • Colonial Viper 15.1

      I know a couple of old undead pollies newly risen again who should be afraid of this review.

  15. chris73 16

    I suppose you need to try to rally the troops somehow but don’t you think that raising the expectations will just lead to greater disapointment come election night (when National romp home)

  16. mikesh 17

    It seems to me that if there is to be no CGT on shares then it would seem sensible for a landlord to set up a limited liability company to own his properties. The when the time came to sell he could simply sell the shares without incurring CGT.

  17. Alex 18

    Great article but I do disagree with you Eddie that it will only cut reduce the rentier model by 15%. It will spur investment into productive areas of the economy and would likely reduce capital gains by more then 15%.

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